Employee Stock Option Plan

Employee Stock Option Plan Employee Stock Option Plan (ESOP) is a scheme through which a company awards its Stock Options to their employees based on their performance and designations.

An employee stock option is a call option meaning that under an ESOP, the employees have the right and not an obligation to buy the shares of the company on a predetermined date at a predetermined price.

The objective of ESOP is to motivate the employees to perform better and improve shareholders’ value.

Apart from giving financial gains to the employees, ESOP also creates a sense of belonging and ownership amongst the employees.

Thus, these instruments are used to reward and compensate employees at a later date. They are helpful because they help the company to defer immediate outflow of cash to compensate employees and thus can focus on growth with greater resources.

One of the major challenges faced by the businesses today is Employee Compensation Cost when the revenues have already taken a huge hit. Some of the common ways business are dealing with this problem is Layoff, furlough and salary cuts, which often makes the remaining employees: • Loose trust in the employer, • Feel Insecure and uncertain about his financial prospects, • Reduce employee morale,

• Less efficient and productive.

This might also result in businesses losing unexpected opportunities due to unavailability of manpower.

In this situation, Employee Stock Options can be the efficient way using which the company can defer the compensation cost of permanent employees. The businesses can pay the employees in equity rather than wholly in cash, which the businesses are facing shortage of in recent times.

Employee Stock Option Plans can benefit the business by: • Minimizing attrition by providing additional reward, • Steer employees towards organization’s vision, • Liberty to Channelize funds in other priority area, • Derives unparalleled Employee Loyalty, • Increasing employee retention, • Attract employees who can be potential assets to the organization.

Along with saving cash, ESOP Schemes also provide motivation to the employees in reviving the business by providing them a sense of ownership and directly relating their reward with the success of the business.

ESOP Schemes are one of the best ways for Startups use to compensate their employees, aligning their vision with the company’s vision.

Such changed circumstances are forcing the businesses to relook at the traditional employee compensation practices and consider share based compensation of employees through ESOPs. Valuation of ESOPs is required at two instances: 1) At the time of Grant of ESOP 2) At the time of Exercise of Options